MOHNISH PABRAI 00:08
So are you all seeing Buffett's letter on the screen? Okay, alright.
So you know, this is not a doctor document. This is a real letter that Warren Buffett wrote to me and responds to me apply for a job with him in 1999. And this was before Pabrai Fund started and at the time the only thing I had an interest in doing was to learn the – Learn the art and science of value investing from him.
And so I suggested to him that he could hire me at zero cost and such. And very quickly within about 5 days of me mailing letter. I had this response back from him which I was pretty disappointed about the time.
And anyways, in a few weeks after that I picked myself up with some help from my friends and decided to start Pabrai Fund and you know, we started with a million dollar made 8 investors. And I tried to set it up as closely as I could to the Buffett Partnerships.
So let's go to the next slide.
And so the question that comes up, you know when you read that letter is that you know, why does Warren Buffett whose got, you know – I don't know, 50-60 billion of new worth want to operate alone and with no analysts or associates?
And then why does Charlie Munger want to do the same? And then there's a good friend of mine who's a value investor – Guy Spier – operates the same way. In fact, he used to have an analyst till he figured out that didn't make much sense and you would actually, you know, kinda causing him to have a results there was somewhat negative and what he wanted and so he went from no analyst to analyst back to no analyst. And I think he's quite happy now.
And of course, you know, I operate alone and the question comes up, you know as to why I would want to do that.
And let's go to the next slide Arvind.
And so, you know the investment business is that there are more than 50,000 publicly traded stocks around the world. And even if you have a 10-person investment team, you know, very smart folks who are in the team. They cannot actually look at more than a few hundred companies as a group together in a year. In fact, they will probably get to less than that number.
And so if you are an investment manager with this 10 person team that you're working with was doing a lot of research for you. You would be sitting in reduced to first a lot of your time, will be going to manage the team but also would be reduced to just getting a cliff notes version of the research these folks were doing and then on top of that you would have secondary data. So you would not really have a full data set the way the primary people doing researching had it.
So and let's go to the next slide Arvind.
And so basically there's no way for investment manager to be on top of thousands of businesses that's just not possible with or without a team. And so really what the investment manager has to do regardless or team size is they have to take shortcuts because, you know, the data set is just too large. And the way they take shortcut, there are many ways to take shortcut.
So, you know, for example there's a mutual fund which is based in Minneapolis called 'Mairs & Power Fund' some of you may have heard of it. And I think the Mairs & Power Fund is almost exclusively invest in companies based in Minneapolis. And so you know, they shrunken that universal public companies to look at by having a mandate only invest in Minnesota companies. There are other companies that only invest in companies that are socially responsible.
And certainly value investors take all kinds of shortcut, they might take shortcuts related to P/Es or book values or you know, cash flow multiple and those sort of things to try to narrow the universe down. And you know, there are – you know, Buffett says that it is not the size of the circle of competence that you have that determines how well you do as an investment manager.
It is knowing the boundaries of that circle really well that are really important. And you know, you don't need to know a whole lot about too many things to do quite well as an investor.
So there's a good friend of Charlie Munger who's – [Broken Recording] [Inaudible], John Arrillaga who lives near Stanford University. And all John does as an investor is he invest in real estate. Which is, you know, within a couple of miles or less Stanford University. So his circle of competence is extremely small, you know, just real estate and just real estate around Stanford from a standing start just doing that he's a billionaire.
And of course, you know, Charlie Munger said that if you wanted to get really rich and have a well-diversified portfolio and you live, you know Peoria, Illinois or something. What you could do is you could own part or all the Ford dealership in Peoria. You could own the McDonald's franchise in Peoria. You could own the best apartment building in Peoria and you could own the highest quality office building in Peoria. And if you had just those 4 assets and if you just own parts of those 4 assets so you don't need to own them 100%. What you could have – let's say at 10% stake in the McDonald's for example.And you never, you know, touch those assets you just kept them. The odd are you would compound money at a quite a spectacular rate and do quite well over time.
And so the bottom line is that in the investment business you don't need to know everything about everything to figure out what are the best investments and such. And a large team is not as helpful as what one might think to get you to the promised land.
And so let's go to the next slide Arvind.
And you know, so one of the things that happens is that when you have an analyst, you know, the chances are that you're hired this person because you in somewhere like them as humans. And they are, you know, pleasant people to be around and such. And they hopefully are smart, you know, BC grads and such.
And when they come up with ideas. This is nature investment business is a lot of the idea that someone thinks are great you might think are not great. And so you will say no and you keep saying no most of the time and sometimes you're saying no to ideas which actually may be good idea.
So any two humans are going to have different circle of competence, because their life experiences is different. And what they've learnt about the world and different businesses and such is different. And so someone could come to you, your analyst could come to you with a great idea. And because it doesn't fit into your circle of competence, you might said well that's – doesn't work for me, we can't do that.
And in fact, this has happened to me. So for example, I think in 2006 or 2007 just when the first iPhone had come out. I have a really smart investor in my fund who is a venture capitalist in Silicon Valley. And he called me and he said 'Mohnish, you know, you got to invest in Apple.'
And I told him very quickly that no, that's not happening because you know, I don't do tech, I don't do businesses with rapid change and so on. And then he laid out for me. You know, why Apple made all the sense in the world to invest. In fact, you know, he's talked about the App Store.
In fact, he laid out what was likely to happen in a manner that was eerie because what unfolded was next several years was quite similar to what he had described to me in a sense that they would transform mobile technology.
They will transformed just the way people – it won't be a phone, it will be a computer in your hand. And the App Store becomes a very high profit margin business for Apple with very little investment. And of course, if I had bought Apple at that time. I think it's probably a 10x from when he was talking to me about it.
But I was right to say no because it was indeed outside my circle of competence. And so if he was an analyst working me, you know, he would be right in bringing the idea to me. I'll be right in rejecting the idea and you know, he would rightfully be unhappy about it.
And the same thing happened with, you know, Amazon. Some of my friends about 10 years ago were pushing Amazon because they just saw the way the company was transforming and everything. And again, it would be a massive home run and again, I said no.
So circle of competence has become one of the issues with having team size greater than 1. Let's go to the next slide. Then you know when you have a team, there's this natural bias for action. You know like Warren says guys are going to say swing you bump, you know, so why aren't you swinging?
And if you have people who have high IQs they're not really good at grinding away endlessly without seeing results. So, you know, some smart analysts keep coming up to you with great ideas. And you keep saying no that's just a very difficult kind of situation to permanently be here.
And just to give you kind of a – you know, a real bit of data in Pabrai Funds. You know, in the last almost 17 months we have had no new investment ideas, zero. And it's not because I haven't looked, I looked for – I spent a lot of time looking for good investment ideas and such. But we never gone to the point where something made enough sense to pull the trigger. And so I just had to say no to myself.
But you know, if I had an analyst or partners the natural institutional bias towards action would take over. You know, I think it will be unlikely to such a long period without acting on ideas.
And you know, I've always thought kind of the best way to set up the job description for an analyst is to hire them and give them the ground rules. And the ground rules would be something like this. Look I really don't want you to be in the office pretty much at all. I would like you to you know, pick a beach that you like to hang out on or a ski hill that you like to be at. And you'll get your paycheck direct-deposited into your account and just hang out at that beach or whatever activity you like to do.
And never ever call me with any investment ideas. And when I need help, you know, drilling down or put it into investment – need your brainpower. I will call you so you need to keep your cellphone around at all times. And when I call you ideally you can call me back within 30 minutes and drop what you're doing and go into full-time research analysis mode. You know, the help that I'm asking for. And then when that's done go back to the swimming or water skiing or skiing whatever else you want to do. And again, you know your paychecks going to keep coming to your bank direct deposit till I call you the next time I need you.
And you can see that this sort of a job description even though it sounds exciting may not be that appealing to even most of you in this room. And so, you know, it's a difficulty in setting up a situation where a person is not constantly feeding you idea and you are constantly saying no, that becomes kind of hard and then you know, the compensation problem comes also kind of a bit difficult.
So someone brings me Amazon or Apple and in my – you know, moment of brilliance I say no in 2007 or 2003 and then it's a 10x or 100x and we missed that ride. And no one made that money. And so how do you compensate a person when things like that happen?
And so can we go to the next slide Arvind.
1. "Any two humans are going to have different circle of competence, because their life experiences is different. And what they've learnt about the world and different businesses and such is different.
2. When you have a team, there's this natural bias for action. Having an analyst or partners the natural institutional bias towards action would take over. It is unlikely to wait a long period without acting on ideas.
3. This is nature investment business is a lot of the idea that someone thinks are great you might think are not great. And so you will say no and you keep saying no most of the time and sometimes you're saying no to ideas which actually may be good idea."